Once upon a time, when I worked as an equity research analyst, I used to meet company managers as part of my research process.

I “grilled” them with my questions and cross-questions, doubted and criticized them, liked those performing well and condemned those that didn’t.

Looking back, I reflect on those times with some wisdom that comes with middle age, and I know that there were things I would have done a bit differently, knowing what I know now about the idea of…empathy.

Empathy is the ability to understand and share the feelings of another. It is the ability to put yourself in another person’s shoes and understand with depth the gravity of their situation.

In general, I believe the world and investors needs more empathy.

Strange how we often feel empathy more easily for fictional characters than for real people. One reason is that sometimes we get to know fictional characters more deeply than real people around us, including our family members, friends, and managements we meet.

As I look back, in my role as an analyst creating words, I was often doubting people who had spent years building businesses, often from scratch, and created actual products and services.

My job did not require me to empathize with them, just question them and seek answers that would fill my brain enough to gurgle out words that would make my reports look impressive.

Over the past nine years of being on my own, I think I have gotten more grounded on this front, empathizing with people running businesses, large and small. Not the crooks and those managers who play around with the capital and responsibility they have been bestowed, but those that keep working honestly, through the ups and downs of business cycles, despite being criticized by armchair analysts and investors for “under-performing” for some time.

So, where I sneered at businesses with minute flaws in their financial performance, like rise in debt to meet working capital requirements, rise in receivables in years of weak overall economy, occasional weakness in revenue and earnings growth and pressure on margins, I now look at them with empathy.

“Is this a bad enough performance or decision to dismiss my long term conviction on this business?” is what I ask often now. If it’s not a matter of business survival/failure, I move on.

Where I blindly questioned managers who were selling even small part of their shareholding in their businesses, I don’t do that now. Instead, I ask, “What if those managers, who helped build those businesses, now wish to benefit from the increased value of their holdings to meet their personal financial goals?”

Managers are as much human as we are, and have as many needs and wants as we have. Isn’t that so?

Of course, honesty and good corporate governance remain non-negotiable for me, but I am perfectly fine stomaching occasional weakness in financial performance or small decision making mistakes from managers, if I hold my conviction on them and the business franchise.

“Evaluating management is an art,” said Prof. Sanjay Bakshi in an interview with The Investor’s Podcast –

You should watch what they do and not what they say. And when you do that, you should have some empathy for the entrepreneur who is running the company. He is not a robot programmed to maximise shareholder value all of the time. He is prone to making mistakes. He will have some attributes that you dislike. Is that a reason to reject investing with him? I don’t think so.

Anyways, here is an excerpt from a 110-year old lecture from former US President Theodore Roosevelt that I read out to my daughter recently. I believe this passage provides a great perspective on the idea of empathizing with people, including honest, hard-working, sometimes erring corporate managers.

The lecture was titled “Citizenship in a Republic”, and this notable passage is referred to as “The Man in the Arena” and it reads thus –

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

Someone who is heavily involved in a situation that requires skill, courage or tenacity – as opposed to someone sitting on the sidelines and watching – is referred to as “the man in the arena.”

An entrepreneur, or that corporate manager whose decision making skills we often criticize when his business and stock are not doing well, is that man in the arena.

We, the analysts and investors, are the ones sitting on the sidelines, watching, talking, and criticizing.

It is better to stumble than to do nothing or to sit by and criticize those that are “in the arena.”

“The poorest way to face life is with a sneer,” said Roosevelt in his speech. It is a sign of weakness. “To judge a man merely by success is an abhorrent wrong,” he said.

In these uncertain times, when businesses and their plans have been brought to their knees, and we investors are busy criticizing managements for their lack of foresight and analyzing how much time it will take for them to recover again so that we can get our capital back, let’s pause … and reflect.

The idea of long term investing is not just to hold high quality stocks for years in your portfolio, but to partner people and businesses that remain high quality for long. And to hold on to such patience and conviction so as to partner them for long, empathy towards them through the thick and thin of business and market cycles, and their occasional mistakes, would serve us well.

That’s about it from me for today.

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Stay safe.

With respect,
— Vishal

https://www.safalniveshak.com/man-in-the-arena/